Leech the economy

Anatole Kaletsky’s evisceration of “old economics” in the London Times may be consistent with the general backlash during the current recession, but it’s half-baked.


Today’s academic approach prevented economists from thinking about a world that is, by its very nature, unpredictable and inconsistent… others may revive the literary and anecdotal traditions of the great economists of the past… Smith and Hayek produced no real mathematical models. Their eloquent writing lacked the “analytical rigour” demanded by modern economics. And none of them ever produced an econometric forecast.

To wish simultaneously for a return to an “anecdotal tradition” and for theories to be “tested against reality” is perverse. The economy is indeed a complex system, and to draw correct conclusions on the relationships in a complex system requires more than anecdote. As epidemiology is to medicine, so econometrics is to economics; a
patient’s recovery after leeching does not prove leeching effective, and folk inference in economics would be just as counterproductive, in its own way. The “analytical rigour” so disdained by Mr. Kaletsky represents the struggle to understand and draw inference from the very real complexity that to rely on anecdote risks ignoring.

The first idea, known as “rational expectations”, maintained that capitalist economies with competitive labour markets do not need stabilising by governments.

The second idea — “efficient markets” — asserted that competitive finance always allocates resources in the most efficient way, reflecting all the best available information and forecasts about the future.

The specific “theories” attacked by Mr. Kaletsky are also grossly misrepresented. Hell, the concept of a theory is being misrepresented. An economic theory is an if-then statement, and this is not a matter of mathematics, which is after all just a language like any other. No theory, no matter how it is expressed, can ever do more than suggest the outcome that would pertain under a given set of conditions. No theory, then, can “[maintain] that capitalist economies… do not need stabilizing by governments”, or “[assert] that competitive finance always allocates resources in the most efficient way”. To attack the assumptions underlying these theories is good and rigorous; to either attack the value of their existence is to distort the purpose of academic inquiry. It is precisely because
theories are if-then that any single conclusion can be given an ‘if’ and be co-opted and championed by the politically powerful of the moment, but the “assertions” come always from the interpreter, not from the theorem.

Literary and cross-disciplinary approaches to economics can have great value in conveying economic ideas and in complementing other forms of research. What would be unacceptable, however, would be the abandonment of valuable tools to help us to understand the way things are. Perhaps attacking economists makes us feel better, but this is like blaming the shipbuilder, engineer or mathematician for a drunk captain’s crash.

And finally, because that felt a bit too serious, I must mention these:

Today’s academic economics reverses this process: if models disagree with reality, it is reality that economists want to change.

Policymakers who turned to academic economists for guidance in last year’s crisis were told in effect: “The situation you are dealing with is impossible: our theories prove that it simply cannot exist.”

This is garbage.

What’s next for economics?

Not every scientist is working on a cure for cancer, but it’s surely one of the big open questions in medical science. Does economics have a cure-for-cancer question, one that every economist would sell his soul to answer?
A thought experiment: there’s an economics seminar or lecture about to take place, in an hour, at a location an hour away from you. You hear a rumor about the content of this seminar. What credible rumor would make you jump in the car and high-tail it to the scene?
Again, being that it’s probably foolhardy to speculate on what the next “big idea” might be, this might be an unanswerable question. Nevertheless, if it’s not possible to think of an example, we might have a problem on our hands. Is this question different in economics than in other fields? 
Broadly, there are three things that might qualify. First would be the uncovering of a new piece of evidence, a Dead Sea scrolls-type discovery that would be vital for some purpose or another. What might that be in economics?
Second, and related, would be proving of some unproven result. Whether an unproven provable theory can logically exist in economics is debatable; in theoretical economics, we’re always subject to the underdetermination problem that skews the definition of “proof”; the theories are always logically consistent from within, and nothing is provable from without. In empirical work, we face not just the problem of where the evidence for our groundbreaking proof comes from, but if it is conceivable that the evidence could realistically exist to make such a proof. There a “proof” could rest on clever data collection or a new econometric technique that can interpret the real-world data in a usefully new way. 
Third, we might have some methodological development, perhaps of the kind that saw “information” formally brought into the methodological fold in the 1970s. Whether this could rightly be called a methodological breakthrough is again not clear: is it not just a new application of the existing methodology? 
Could neuroeconomics, partway closing the underdetermination door, do the trick? Will the modeling of complex systems by powerful computers help? All I know is that fewer than 1% of economics seminars are genuinely interesting in and of themselves (that is, apart from the paper and to the terminally curious); what could boost that ratio?